Dubai: Inflation concerns started dominating discussions in the financial community last year, but it has heightened in recent weeks, especially among those who have money invested in markets.
Switzerland-based global financial service provider UBS revealed that almost one in every two investors globally, including the UAE, now see inflation accelerating over the next 12 months and plan to adjust their investment portfolios accordingly.
“Investors in the UAE are looking for investment opportunities to protect their purchasing power against inflation, with many eyeing real estate and sustainable investments,” said Ali Janoudi, head of Wealth Management Middle East and Africa at UBS.
They are also optimistic about the UAE economy, Janoudi further noted, while adding that a continued favourable pro-risk investor stance in stocks is warranted and sustainable investing is UBS’ preferred approach to investing currently.
(UBS conducted an extensive survey among 2,999 investors with at least $1 million (Dh3.67 million) in investable assets and 1,201 business owners with at least $1 million (Dh3.67 million) in annual revenue, evaluated between June 23 to July 12 of this year – 2021..
The quarterly ‘Investor Sentiment’ global study was held across 15 markets, namely the UAE, Argentina, Brazil, Mainland China, France, Germany, Hong Kong, Italy, Japan, Mexico, Russia, Singapore, Switzerland, the UK and the US.)
Buy more stocks, gold and real estate?
Specifically, the survey found that 35 per cent of investors plan to add stocks, 33 per cent plan to add precious metals, 32 per cent plan to add sustainable investments, and 32 per cent are planning to add real estate.
However, the UBS analysts revealed that while inflation is a concern, global investor optimism remains high on their own region’s economy for the next 12 months (70 per cent) and stock market performance over the next six months (67 per cent).
“Though we expect the recent rise in inflation to ease, the outlook for inflation remains uncertain and therefore building inflation protection into portfolios is an appropriate step for investors to be taking now,” said Tom Naratil, co-president of UBS Global Wealth Management
“This includes investing in commodities, private market infrastructure, and stocks with pricing power ( the ability to pass higher expenses on to consumers), as these areas tend to perform better in an inflationary environment and will help to preserve purchasing power over the long term.”
How UAE investors tweak their investments
Similarly, the analysts further noted UAE investors are expecting to feel the impact of inflation, with 46 per cent of investors, which were surveyed, thinking that inflation will accelerate over the next 12 months and almost all of them anticipating the rise of inflation will have an impact on their portfolio.
To counteract the effects expected to accompany inflation, 35 per cent of UAE investors are showing interest in real estate, whereas 34 per cent of them are considering sustainable investments, and 32 per cent of them are considering portfolio hedges.
Additionally, 83 per cent of UAE investors showed confidence in the stock market and 47 per cent expressed their intentions as result to increase their allocation to stocks in the coming six months.
“The Delta variant is leading to renewed worries about lockdowns, inflation has proven to be higher and longer lasting than many thought, and US-China tensions are resurfacing,” said Iqbal Khan, also co-president of UBS Global Wealth Management.
“It’s no wonder that we see some nervousness and uncertainty amongst investors, particularly in the US and Asia,” Khan added, while eyeing that there will be no return to lockdowns and inflation receding in the second half of the year. “This should be positive for the re-opening of economies.”
While investors in the UAE remain optimistic, majority of the respondents of the UBS survey revealed that COVID-19 is still their top concern, closely followed by both climate change and cybersecurity.
How will inflation affect my investment portfolio?
Most often, the primary aim of investors is to grow their money at a rate that will meet their goals, and comfortably exceed inflation.
Although more volatile, stock market investments have historically performed well, benefiting from the earnings of companies usually rising along with inflation and when dividends are re-invested. It is these dividends that help in the battle to beat inflation, particularly when returns compound.
Why are inflation expectations rising?
For the first time since the global financial crisis, inflation expectations have risen above that what was seen over the last five years. Current estimates, as indicated by the UBS and multiple surveys worldwide, indicate that investors are beginning to consider a return of inflation over the medium term.
A year ago, markets were in the grip of the coronavirus crisis. Stock markets were tanking and central banks were embarking on aggressive interest rate cuts and other stimulus measures to steady the financial system.
What happened to what is widely perceived as safe-haven investments or fixed income assets (like bonds), was that it sent prices rocketing, pushing yields to rock-bottom levels. (Bond yield is a return on investment, expressed as a percentage, for a bond, i.e. interest rates offered by bonds.)
Now, the current pressing issue for investors is that those bond prices have been falling back and yields are rising. Some hedge funds are raking in big returns. But other investors are fretting that it could yet seriously destabilise markets.
Is inflation bad for my so-called ‘safe’ investments?
It’s bad news for investment holdings in bonds. Bond prices have been sky high, thanks to the massive monetary stimulus launched by central banks seeking to soften the blow of the pandemic. But the pullback at the start of 2021 has been fierce as investors try to price in inflation before it happens.
Inflation hurts bond market investments because it eats away at the real value of the fixed interest payments, and it could force the hand of inflation-targeting central bankers into limiting their stimulus.
One reason why stock markets have been rallying strong in recent months, despite the economic impact of coronavirus, is that bond yields are so low. But the danger is that with yields picking up, some parts of the stock market might suffer. Analysts have seen this, particularly with top technology stocks.
Verdict: So, is your investment portfolio protected from the looming inflation?
The classic split for an investment portfolio is 60 per cent equities, 40 per cent bonds, which operate under the premise that as one asset class falls, the other usually rises.
However, as yields have sunk so low that they offer little scope for further gains if stocks take a knock. This recent pick-up in yields provides a little more padding.
Market and veteran investment experts evaluate that central banks will step up to prevent bonds falling too far, too fast, then bonds should continue to offer a little comfort in the event of a rapid descent in stocks.
